Economic turbulence threatens ANC power

Summary - Sometime between late 2006 and 2010 South Africa will encounter major economic problems. This is because South Africa is still highly reliant on commodities and therefore vulnerable to sharp declines in world output and trade; moreover, the global economy is grossly over-dependent on the United States. Trade accounted for more than 61 per cent of our GDP in 2002. Thus South Africa benefits when global output and trade are bullish but is unpleasantly exposed during global recessions. Sound domestic economic management, which we have largely enjoyed since 1994, can cushion some of the downside risk but we have no control over international events. What effect could an economic downturn have on South Africa’s political dispensation? In the medium term it is unlikely to threaten the ANC’s near-total control. The ANC, like most political parties, will adopt or jettison policies to preserve power. Also, liberationist parties in Africa are almost certain to maintain power for 10 to 20 years, even where there is gross incompetence. However, economic issues are playing an increasingly important role in Africa and a second economic crisis, say around 2015-2020, could present a fundamental challenge to the ANC’s hegemony. Mozambique’s experience is instructive. When Mozambique was finally forced to hold internationally monitored elections in the 1990s, most people assumed that Frelimo would win easily, despite the miserable economic legacy left by its late hardline Marxist leader Samora Machel. Yet the supposedly no-hope Renamo came very close to winning that election. In 2004, however, Frelimo won 63 per cent of the vote. The reason is that Machel’s successor, Joaquim Chissano, introduced a more pragmatic, partly market-based approach to economy policy, with the result that Mozambique’s economy became one of the world’s fastest-growing, albeit off a desperately low base. In today’s Africa, in other words, Bill Clinton’s dictum (‘it’s the economy, stupid’) offers opposition parties the chance for at least appreciable advances, if not victory. Zimbabwe offers another example of economic failure leading to populist rejection of the ‘liberation’ party. After impressive growth in the 1980s, its economy declined steadily throughout the 1990s, and the opposition Movement for Democratic Change shocked the ruling party by winning the constitutional referendum in 2000. Robert Mugabe had to employ dirty tricks to win that year’s general election, and he will never risk a free vote again. How big could a future economic setback be? There is a real chance of a shock comparable to that caused by the ‘Asian contagion’ crisis of 1997-98, when our annual growth rate tumbled from over 3.5 per cent to a mere 0.5 per cent. However, our economy is healthier now, and business and consumer confidence are high. The big underlying risk is international over-dependence on the US to fuel growth. In 1999 US treasury secretary Larry Summers warned that the global economy could not ‘keep flying on one engine’. Stephen Roach, chief economist at Morgan Stanley, estimated that the US accounted for 90 per cent of the increase in global GDP between 1995 and 2002 (30 per cent being the US’s contribution to rising world output and 60 per cent the contribution made by America’s purchase of foreign goods). In other words, the strong economic growth recorded by many countries has been fuelled by a constantly rising US trade deficit. This has major potential implications for South Africa’s financial as well as social stability.

South Africa will run into major but temporary economic problems down the line.

These could come as early as the second half of 2006. But they might hold off until much closer to 2010.

What effect, if any, however, will this have on the near-absolute political control of South Africa now exercised by the African National Congress (ANC)?

That is the core focus of this article. First, though, we must consider the economic background.

The main reasons, discussed in detail below, that I believe South Africa is bound to face a period of significant setback are:

• South Africa is still hugely reliant on commodities and commodity-based economic activity, which necessarily means that South Africa remains highly vulnerable to sharp declines in the growth of world output and world trade.
• These global factors are grossly over-dependent on the United States — above all on its capacity and willingness to act as “international importer of last resort”.
• So world economic fragility and imbalance makes a country such as South Africa — where trade plays a pivotal role — intrinsically volatile.

In 2002, for example, this country’s aggregate trade (exports and imports of goods and services) was equal to more than 61 per cent of South Africa’s total gross domestic product (GDP).

Obviously, though, when global output and global trade are powering ahead — as they did in 2004 — South Africa has the potential for solid gains.

Conversely, however, international weakness must leave South Africa unpleasantly exposed.

Sound domestic economic management, which South Africa has largely, but far from wholly, enjoyed since 1994, can cushion some of that downside. Poor management would make an unhappy situation that much worse.

But South Africa has no control at all over the mainline world situation.

I see severe international turbulence looming. This could technically still be averted if:

1. Germany and Japan can get a much better growth act together;
2. Asia generally can stop believing it can prosper forever on the back of the US;
3. America can then tackle both its unsustainably high trade deficit and its excessive budget deficit.

Reality indicates, however, that it will require a sharp and nasty jolt to the world economy first before there is any meaningful trigger to vital action on all these fronts.

South Africa is therefore headed, along particularly with other highly trade-dependent nations, for a period of economic difficulty.

The “when” is uncertain. So is the extent of the coming trouble. But there’s no doubt that some period of hard times is somewhere in the pipeline.

Note, too, that even in an essentially favourable global economic environment — and 1954-2004 was overwhelmingly the best 50 years in world history — booms are still punctuated by occasional busts.

The business cycle has not been abolished, even if some counties (such as China today) appear at times, ultimately illusorily, to be exempt.

All booms and semi-booms, national or international, will on occasion be subject to busts. That most definitely applies to this country.

The core issue here, however, is what consequential effect, if any, this could have on South Africa’s internal political dispensation.

In essence, could the ANC’s near-total control of South Africa be in any way significantly threatened, or at any rate diluted, by this assumed adverse economic development?

My view is “no”, on both counts — in the medium-term at least. There will, though, naturally be some temporary party discomfort and some permanent personal upsets.

However, if/when there is a second economic crisis — in the 2015-2020 period probably — that could well then present a fundamental challenge to the ANC, and whatever its leadership, at that stage.

But the ANC looks to have quite a number of things in common with the Chinese Communist Party — and, come to that, with scores of political parties in other countries.

These are:

• Regarding most policies as expendable or, at least, malleable, particularly in crunch situations.
• Recognising that all leaders (after the retirement of Nelson Mandela) are never remotely as important as the party itself.
• Elevating the preservation of almost total political power as the de facto primary objective of the ANC, even if many activists do not agree, in principle.

In other words, in an economic or any other crisis, all kinds of policies can be taken up or jettisoned, permanently or more fleetingly, irrespective of previous stances, if that is deemed necessary to try and blot out any possibility of any government-in-waiting opposition arising.

African experience broadly indicates that any party which takes power with the “liberation” mantle is basically sure to maintain that power — coups, wars, deep tribal and/or religious schisms aside — for 10 to 20 years minimum.

That’s true even where gross economic and other incompetence prevails. See the records, as examples, of Zambia under Kenneth Kaunda and the United National Independence Party (Unip), and Mozambique’s Frelimo after the catastrophic rule of Samora Machel.

Sure, that rule-of-thumb doesn’t hold as well elsewhere. Ask, especially, Lech Walesa and Solidarity in Poland. They soon sank from sight for all their liberation heroics.

Of course, SA today is completely different from virtually all post-colonial African nations in the 1960s and 1970s.

Genuinely free elections then either never took place at all or were soon stopped. But things have changed dramatically.

Robert Guest, Africa editor of The Economist, notes: “In the 1960s and 1970s no ruler in sub-Saharan Africa was voted out of office. In 1980s one was (Mauritius). Since then 18 have been voted out…”.

Tribal, regional, religious and other such factors are often crucial. But economic issues are clearly increasingly playing the kind of major — but far from always conclusive — role that they have long played in established democracies in the industrial world.

Simply, the ANC might, quite reasonably, appear unchallengeable. But if — and this is a hypothesis, not a forecast — South Africa were to suffer recurring economic weakness even the ANC would soon become vulnerable to decline at the polls.

The experience of Mozambique in the 1990s is instructive.

When Mozambique was finally forced into internationally monitored elections in the 1990s it was assumed that Frelimo would win by a landslide. The Renamo opposition was supposedly little more than a creation of dissident Portuguese and South Africa’s apartheid intelligence operations.

But virtually no notice was taken of the miserable legacy of economic nonsense left by the late Mozambique hardliner Marxist leader Samora Machel.

The supposed “no hope” Renamo came within a whisker of winning the first election. In 1999 the winning margin for Frelimo was clearer, but the party still got only 52,3 per cent of total votes.

In 2004, however, Frelimo romped home with a crushing 63 per cent.

The explanation is that Machel’s successor, Joaquim Chissano, brought a much more pragmatic, partly market-based approach, to economic policy. That in turn has produced one of the world’s fastest growing economies, albeit off a desperately low original. Chissano has recently been succeeded by wealthy businessman Armando Guebuza.

The lesson of Mozambique’s elections since the 1990s is that they have proved again how much economics can matter.

I don’t see any re-run of that in South Africa, especially because the ANC is already so dominant and also because I think external events in the medium-term will limit

South Africa’s overall growth in living standards.

But it’s proof yet again that in today’s Africa the Clinton dictum — “it’s the economy, stupid” — is bound to offer all democratic oppositions chances for at least appreciable advances, if not victory, at some time.

Go back further, even to some changeovers in highly authoritarian countries. For instance, Tanzania’s Julius Nyerere “voluntarily” stepped down from office in 1985.

He, too, as sanctimonious as he was allegedly saintly, was an economic disaster. More, his forced Soviet-style rural collectivisation programme (“ujamaa”) was as chronic a failure as it was brutally inhumane and massively unpopular.

But are there more contemporary parallels for economic failure leading to populist rejection of the “liberation” party at the ballot box?

By far the most obvious is Zimbabwe, Robert Mugabe and the ruling Zane-PF party.

In the 1980s Zimbabwe enjoyed much real success. The International Monetary Fund (IMF) says average annual economic growth in Zimbabwe between 1981 and 1990 was a handsome 4,4 per cent.

No wonder Mugabe and Zanu-PF never thought there was any chance of losing a constitutional referendum (an apparently affordable gesture of confidence) in early 2000.

But the almost unnoticed — by Mugabe, and by the rest of the world — Movement for Democratic Change (MDC), headed by Morgan Tsvangirai won the referendum. The Zimbabwean economy had been steadily going down the drain in the 1990s and the MDC was a giant political beneficiary.

Every dirty trick had then to be played by Mugabe to scrape up a supposed victory in that year’s general election. Moreover, the pressure on MDC leaders and voters has been colossally intensified over the past four years.

Mugabe will never take any free-vote chance again. This shows again that the ANC is at least theoretically vulnerable to some serious opposition to it, arising five to ten years or so ahead, if South Africa is hit by sharply negative economic events. It’s no matter, either, whether or not those are basically caused by external developments rather than domestic policy follies.

But how big could future economic setbacks be?

There is certainly no expectation of any kind of financial tsunami. But there is a very real chance of at least a re-run (and maybe worse) of something like the powerful shock waves that hit South Africa in the wake of the ‘Asian contagion’ crisis of 1997-98.

South Africa’s annual economic growth rate then tumbled from an average of over 3,5 per cent for 1994-96 to 2,6 per cent in 1997 and a mere 0,5 per cent in 1998.

That in turn led to a cut in average real gross national income per capita in constant 2000 prices — a fair proxy for living standards — from just under R21 000 in 1996-97 to barely above R20 250 in 1999. The comparative figure way back in 1971 was R20 441.

But the South African economy is a lot healthier now, and still advancing, than it was in the late 1990s.

In early 2005 business and consumer confidence in SA were definitely both showing net buoyancy.

A high-level assessment report from the International Monetary Fund commented in December 2004: “Inflation has been brought under control, public finances have been strengthened and the international foreign exchange reserve position has improved.”

The IMF report continued: “The directors considered these achievements have laid the foundation for higher sustained growth, greater competition, increased efficiency and reduced external vulnerability.”

South Africa’s own business leaders are strongly supportive in general, too, of finance minister Trevor Manuel. This is reflected, as a key example, in the regular business confidence surveys carried out by, in particular, the Stellenbosch Bureau for Economic Research.

Further, Reserve Bank governor Tito Mboweni has proved the very model of a modern central banker — too much so, complain some mainline economists and business leaders, let alone the familiar critics of the left.

The key factor is that the all-in financial management of the South Africa economy — even with some singularly unhelpful observations at times from president Thabo Mbeki — has been hugely sounder than anyone foresaw over a decade ago.

Again, this invites the obvious question: Why on earth in that case is the possibility, let alone a mooted probability, of a significant economic setback ahead even raised in this article at all? Why debate the necessary unknown political implications of something that doesn’t seem worth consideration anyway?

The key fact is that the big underlying risk to the South Africa economy does not lie directly within the control of this country’s policymakers.

There is chronic over-dependence internationally on the United States to fuel growth. The full extent of this addictive reliance is barely understood by most economists, never mind the politicians.

Nor is this situation remotely new. It has now been going on, with ever-increasing likelihood of eventual catastrophe, for close on ten years.

In 1999, for instance, Larry Summers, then US Treasury Secretary and a former chief economist of the World Bank (today he is president of Harvard University) warned that the global economy could not “keep flying on one engine”, ie America.

The US, he noted, had become the universal “importer of last resort” — and unless that was steadily unwound, it could only end ultimately in an upsurge in protection in the US and tears everywhere.

Far from improving, though, things have become worse.

Stephen Roach, chief economist of Morgan Stanley banking group, told a Chinese audience in 2003: “Never before has the modern world economy been so lopsided. Between 1995 and 2002 the US accounted, directly and indirectly, for more than 90 per cent of the increase in global gross domestic product (GDP).”

His estimate was based on the US contribution to rising world output (30 per cent) and the hugely greater indirect contribution (60 per cent +) that America’s colossal buying of foreign goods makes.

In other words, the strong economic growth recorded by so many countries has ultimately been essentially fuelled by a constantly rising US trade deficit.

This obviously has major potential implications in South Africa for growth, living standards, jobs, interest rates, the rand and a host of other financial issues.

It also raises important questions about South Africa’s still fragile (but hugely less so, apparently, than a decade ago) social stability.